Ask the Grumpies: Why are college costs increasing faster than inflation?

October 4, 2013 — nicoleandmaggie

FGA asks:

I’d like to hear your take on Student Loans. Specifically, do you think access to student loans is enabling these costs to spiral out of control? I mean I couldn’t have gone to university without them, but I also majored in something where I knew I could pay them off when I was done. I also think it’s a little odd that this is the only type of debt that can’t be wiped clean with bankruptcy, so it’s an incentive to banks to loan as much as possible. In fact, when I was in college, they were actually trying to lend me more money than I needed.

It is well known that college costs are increasing at a rate faster than inflation. Though this increase isn’t as large as many people think because often people compare the sticker costs of private colleges rather than the actual realized costs of college once grant-based financial aid has been applied.

I’m not sure if we’ve really nailed down the answer here. One explanation I’ve seen links the increasing costs of college to the increasing costs of health care. As developed nations become richer, there’s only so much more stuff we can get, so we start paying more for services like better health and education. We’re paying more, but that’s because we’re demanding more and we’re getting more in return.

A big factor at the public university level in terms of increasing costs is the loss of government support for public education. States are sending less money to the state universities and the universities have to make that money up.

It is true that dorms have gotten fancier and more expensive, but apparently that’s only a small share of the increased costs, and can’t explain it, as much as we’d like that to be an explanation. In addition, Dean Dad points out that colleges keep getting unfunded mandates: such as keeping track of mad details for financial aid; more services for disabilities, returning students, veterans, students with families, etc… enrollment verification for employment; tutoring centers for the mountains of remedial students… these are great things for schools to have but are often not funded in a budget line, so money has to come from students.

We do know that the loan situation is keeping for-profit institutions in business that should not be in business. Some of them prey on potential students and return very little for high tuition. We definitely need better regulation there.

I don’t think we know so much about publics and non-profits. They have different functions. If we cut student loans, would colleges get less expensive? Well, many of them would go out of business. Rich people would still get degrees. Poor people would probably still get grants, though many people wouldn’t even apply because they wouldn’t realize they could get grants, or they couldn’t afford the tiny amount they still needed to be funded without loans. The middle class would probably be the biggest losers. The return to a college degree would also get larger as fewer people got degrees. Economic inequality would increase. Productivity would go down. Companies would have to offer more on-the-job training. It would be the reverse of the GI bill.

Economic theory suggests that loans for college are a good thing– we lose a ton of efficiency when people would benefit economically from getting education but are credit constrained so they can’t pay for it. Borrowing from future earnings allows people to jump into higher income brackets and is good for the economy.

However, given that we’re in a world without perfect information, and teenagers and 20-somethings can’t be trusted to have their long-term best interests in mind (ex. spending high interest loan money on beer and fancy dorms because they don’t understand compound interest with their unsubsidized loans), caps for non-subsidized loans can still be argued for. Some of these debts are so large that it would be incredibly difficult to pay them back given most post-college situations and the interest rates are high. Subsidized loans don’t get you in too much trouble given their current constraints and the fact that they don’t compound while you’re not paying them off.

So in our opinion, subsidized loans probably aren’t enough. We could probably give out a bit more than what we do. But we wouldn’t increase that much more (and really, we’d expand the Pell grant first!) We should look more at unsubsidized debt and reform that. Maybe we should cap interest rates or allow bankruptcy defaults on it. It’s generally thought that the lending agents are getting far too sweet a deal on the unsubsidized stuff, and predatory for-profit agencies are taking advantage as well. Though, of course, we also have to think about how much we want to protect people from themselves (specifically from their past selves). And that’s a big philosophical problem.

25 Responses to “Ask the Grumpies: Why are college costs increasing faster than inflation?”

I see it mainly as an example of Baumol’s cost disease. Productivity improvements are limited and it’s labor intensive. So the cost rises faster than the economy-wide average increase in costs. Add to that all the things you mentioned in the blog above…

I think basic supply and demand has something to do with this. Lots more people are pursuing degrees, yet a bachelor’s degree doesn’t have the same social/cultural value as it did 50 or even 25 or 10 years ago. Another factor is the emphasis on non-academic endeavors. Sports (e.g.) are a big distraction for university spending, and a big attraction for targeted alumni giving and participation. In both these instances, it’s hard to tell how higher ed could extract itself from the vicious circles.

Other thoughts on student loans: #!@$. But that’s because I’ve got 4 more years of paying them off at $500/month (almost double the minimum) and have been paying them off in bits and pieces since I got my first 6 years ago, in earnest since they came out of hibernation 3 years ago. TEN YEARS of paying off student loans…. I’ll be able to put a down-payment on a house in my fifties? Maybe?

Hm, so maybe the easing of credit constraints is helping people with lower (but still positive) marginal returns to education to go to college, but they use more resources than previous students with higher returns to education who were going before anyway. We’re moving down the curve. And that’s not a bad thing, it’s still efficient in the cost-benefit analysis, but it could lead to more intensive use of resources. (As in, before maybe only people who never failed classes went to college, now people who fail from time to time also go, and educating them costs more than the people who never fail and doesn’t produce as big a bang for the buck. But it still produces surplus, and more surplus overall adding up everybody, just not as much *on average* as before.)

I think I understand what you’re saying. I would never earn the salary level I do now, nor would have reached it as quickly, without my bachelor’s degree. And even if you subtract the amount I pay for student loans annually ($6K), my adjusted gross salary is STILL more than I’d make in any job without a bachelor’s degree. At least, as far as I can tell – “how much do you make” is just not something you ask people, so the only data I have to go on are impersonal and hypothetical.

You’re probably one of the folks who was a perfect match for college anyway. Some of our students are more on the margin, but still a little better off with the degree than without. The marginal cost for each of them may be higher than the marginal cost of someone like you, which would drive up costs, but still wouldn’t lead to a policy saying that they shouldn’t go.

Maybe we need to scale this back a little. Like, thinking about “tracks” in secondary school so that students can specialize earlier in ways that play to their strengths. I know quite a few people who went to college at least for a little while for lack of a better option – they were good at something, but the only options available to them to get the training they really needed kinda sucked. So they failed (to complete, that is) in a system that wasn’t designed for their needs.

The counter-factual is: would they have been better off doing something else? Chances are they wouldn’t have. Chances are, they’d have been just as flakey not in college in whatever track they were set up for. Some folks need to grow up before they can do much of anything.

Also we tend to get into bad kinds of discrimination when we let rich white guys have a chance at failing but don’t let poorer folks have a chance (given that many will succeed even if the probability of success isn’t 100%). That’s often used as an argument to keep minorities out of top law (and other) schools (“setting up for failure”).

Sadly, I think there’s been a lot of education inflation. Now that a lot of people have college degrees, a lot of employers will only look at people with degrees because it’s an easy (and defensible) way to eliminate some people, even for jobs that do not need a degree. Holy, moly, most jobs only need you to be able to do basic reading and writing (surely achieved by the fifth grade) plus conscientiousness (not really taught in schools, though grades probably help). So it kind of makes me angry that we require expensive degrees for everything. (Not angry for me, though, because I loved college. And grad school.)

I did a sophomore summer in France and spent three weeks living with a French lady. She had two sons; one of them had taken the exams to go to university, the other one wanted to be a merchant sailor. The Sailor kid was released from high school at 16 and went straight to work; but he had to take a vocational course for at least a year before that. I don’t think either of them had to pay for their course of study.

I could go on for hours about the reforms I think our public education system (K-BA) needs, but will simply say, I do not think any publicly-funded universities ought to offer remedial courses of any kind,* and I also do not think publicly-funded universities should be permitted to have more than one competitive team sport on campus. The amounts of money spent fielding baseball AND basketball AND football teams are shocking, and generally provide little benefit to the school itself, the athletes, or certainly the non-athlete students. Alumni push, I know. The result is state of the art stadia on campuses with 60-yr-old libraries, and millionaire coaches working alongside a raft of part-time untenured professors.

Re: loans, non-subsidized loans absolutely should be capped; and absolutely the lenders should not be permitted to compound while the student is still enrolled. But you have to ensure that a cap takes into account all loans the student is seeking, not just the loans from the private lender. I think a fair cap for total education debt would be the national average annual wage/salary for a graduate holding the degree sought. That would put the kibosh on people graduating with $100,000 history B.A. degrees.

*This is harsh, but having gone to college in Georgia and seen the illiterates who were allowed to enter college – and being fairly sure that this phenomenon is neither lost to history nor unique to Georgia – I have to say, if a student cannot speak, read, and write proper English, and perform elementary mathematics, then that student is simply not ready for college and needs to go to night school or summer school or whatever else. I think it’s a better use of public money to subsidize these students in vocational schools or high-school-return programs than in colleges. There also needs to be a distinction between the demands of high school and college, and if you’re teaching the same stuff in college that these students failed in high school, that distinction is not being made.

You have to be careful though– these reforms only work if everyone has equal access to excellent K-12 education and the only reason students aren’t learning is because of personal failures rather than the schools failing them.

Plus, technical school isn’t necessarily a solution — it won’t make most low quality potential workers into high quality workers. Some level of competence is necessary to get a technical associates degree. Some of these folks would have an easier time getting through college than they would through technical training (which is often more math intensive!) and they’ll do less damage in white collar careers than they would in technical positions that could kill people if they make a mistake.

I kind of like what my state did. (Shocking, really–my state sucks in so many ways.) They let the top 10% (measured by GPA) from every high school in, no matter how crappy the school. This means you get the best and the brightest, even if poverty and racism means some of those folks aren’t prepared for college. Then the colleges do have remedial courses.

You can game anything. (And I could have gotten most of my important classes over with before senior year. But at some terrible school, I wouldn’t have had good calculus or additional good science or been able to take sociology/philosophy as an elective. Even at my good school, I had pretty mediocre Senior English.) Still, as a way to try to get minorities in without the courts calling them racist, I thought it was genius.

California has something similar. I think it does work at getting more minorities into TX state schools, but it’s been a long time since I saw that presentation so I don’t remember for sure. I could probably look it up…

I’m not an economist, so this is just the view from my family experience. I think colleges charge what they do because they can. The is certainly true of the Ivies and schools like Williams etc for which demand far outstrips number of seats. When my son was applying in 2007 (before meltdown), we searched for colleges with relatively low tuition and generous merit aid. We homed in on Grinnell, an excellent lib arts school, with a huge endowment and tuition about 10,000 under similar schools (Oberlin, Earlham, etc). About a week after applications were due, Grinnell announced that it was raising its tuition by $10,000–why??? To be in line with its “peers.” UGH.

A few years later, my daughter did a similar search. We looked at a school with relatively low tuition–$20,000 at the time. Amazingly, my daughter received a $20,000 per year merit scholarship. She chose not to attend, but when we mentioned the school the next year to a friend interested in the school, she mentioned that the tuition was now $32,000. Oh, we would have been pretty angry if my daughter had opted for that school.

These elite private schools can give very good financial aid, partly because they can charge higher tuitions to well-off families. Grinnell would have been almost free for me. Earlham was going to pay me money to go on top of tuition.

Most likely they would have increased your daughter’s scholarship to 32K the next year, unless it’s one of those bait and switch schools. But the elite schools don’t bait and switch, only underendowed schools do. (My undergrad actually increased my financial aid each year and my last year was completely free.)

As we note above, the sticker price has nothing to do with the realized price for most students. Sticker prices can go higher but realized prices may not change for the vast majority because the schools make up for it with financial aid. (Lots of recent Hoxby papers on this topic. Well worth reading.)

My elite school did not take your savings and divide it by four to get the amount you should contribute each year–they wanted you to contribute all of it (up to some limit) the first year. That sounded scary to me. (Not that my family had any savings to begin with.)

I just trusted that the financial aid people weren’t expecting me to take more loans than were reasonable to repay. I feel stupid about that now, though it worked out for me (I did get jobs and eventually a real job, and my minimum payments were the size of a normal car payment, so I could afford them by not having a car payment).

On the positive side, it is very difficult to take out more subsidized loans than are reasonable to repay… there definitely is something out of whack with the unsubsidized loans (not to mention credit cards, though it is harder now for college students to get those than it used to be).

Yep, the only real problems for those are when you can’t find a decent job or worse, you don’t even graduate.

Back in my day (class of 1984), it was almost impossible to get credit cards at all–just before graduating you might get an offer for a gas card and then work your way up from there. So, I think it’s still easier now. Plus everyone needs expensive things: cell phones, computers, internet access.

When I was applying to college, financial aid at my alma mater was not as generous as it is now, and I remember being quite peeved with the line that it was fine to charge higher prices because people would just get it back in financial aid. We were right on the border and it was not nothing for us to pay tuition, as our illustrious provost announced. Fortunately, a few other things came together and I was still able to go.
It makes perfect sense to borrow money from your future income, given that college generally does raise one’s income. The problem, of course, is when people drop out without the degree, but still have lots of loans. The income payoff from having some college, but not a degree, is lower.
I also think that we draw too sharp a line between technical training and college tracks. I toured a vocational high school the other day, and one young lady in the nursing program was already working as a CNA and was on to college to get her BSN (while earning decent money with her training). Likewise, a young man I spoke with had done the computer tech track, and was also on to college to study more — while having useful skills to work while he was there.
College is ripe for disruption, as technology is wont to do. If someone can offer a highly competitive and sought after degree for $5000 (as some are trying!) by leveraging technology, we shall see what happens.

Princeton was pretty stingy back then! (Just as well I went to a generous SLAC instead. Or maybe my parents were poor enough that we’d have qualified for more, and they had been saving our entire lives to enable us to go to the colleges of our choice in any case. So they had money for our college.) But hey, Princeton is free for lower middle class and poor folks now.

We don’t actually know what the sheepskin effect is compared to the marginal benefit of an additional year of college. That’s one of the big unsolved questions in labor economics. People with some college tend to do very well, but most datasets don’t separate types of associate degrees or even separate that from two years of a 4 year degree.

I’m very interested in this topic and the comments! The “teenagers can’t be trusted to have their long-term best interests in mind” statement is quite applicable to my situation, even though I didn’t spend my loan money on booze and shoes.

When I was looking at colleges, I was offered very generous scholarships from a couple of different schools which would have allowed me to graduate debt-free, but these schools had pretty poor programs for what I was interested in majoring in. At the time it appeared that going somewhere “better” and taking out some loans was a much better choice–I worked all through college and paid off a significant chunk of my small liberal arts school tuition by scholarships, but I still graduated with ~$25k in mostly unsubsidized loan debt (which is still in deferment since I’m in grad school). I had no idea that I’d decide to go to grad school and then likely continue working as a postdoc with only marginally better pay for the next 3-5 years post-grad school. While paying them off won’t be a huge burden on me as long as I remain child-free, it’s definitely going to impact me long-term, since that’s a significant chunk of money that I won’t be socking away for a home or for retirement.

In retrospect I probably should have looked harder for schools to attend that had better programs and would give me better aid, but I think anyone would have had a difficult time convincing High School Me that it would be wise to do that. I don’t think I am alone in this situation–many of my peers also felt that they had to choose between a financially “better” option and the one with the best long-term impacts on their careers. I’m not at all convinced that I would have chosen differently if I knew then what I know now, though.

I know that my graduate school would not have accepted me if I hadn’t gone to an elite undergrad. Fortunately for me, my elite undergrad also gave me a lot of financial aid! But there were schools who would have given me more money, but I wouldn’t have had the same opportunity set upon graduation.